Europe Needs Policies on Russia and Energy

A year ago, the European Union was at a loss when Russia cut gas supplies to Europe through Ukraine and thus to Europe. Exactly one year later, Russia cuts oil supplies to Europe through Belarus, and the EU is equally lost. Seldom haws Russia so clearly displayed its principles. It is time for the EU to adopt policies on both Russia and energy. Otherwise, the cost of Europe's disorientation may grow exponentially.

Russia is a market economy, and even its state sector is highly commercialized. In the last few years, the Kremlin has successfully focused on boosting the price of Gazprom stocks, rendering it the third most valuable publicly traded company in the world. Part of this endeavor has been to abolish political subsidies to friendly former Soviet republics and let gas and oil prices approach market prices. Belarus was the last country to enjoy oil subsidies from Russia, and now they are gone.

The problem is not that Russia has hiked its prices but how rashly it has done so and that it has hurt third parties. On December 10, the Russian government imposed export taxes on Belarus by decree, raising the Belarusian oil price by $181 a ton, or 64 percent, from January 1. It did so unilaterally without negotiation.

Cleverly, Belarus responded in a similar fashion. In early January, it imposed itw own tax of $45 per ton on Russian oil transited through Belarus, which is enough to make railway transportation cheaper than the pipeline. Russia's state-owned oil pipeline company Transneft refused to pay, but then Belarus impounded the corresponding volume of oil. Transneft retaliated by stopping its oil exports through Belarus, hurting its European clients. Almost one-third of Russia's oil exports to Europe go through Belarus, and no alternative means of transportation is available. Thus, it was Russia that harmed its European customers, not Belarus.

But on January 4, the Deputy Head of the Kremlin's press service, Dmitri Peskov, had made an unequivocal statement on Russia's oil dispute with Belarus: "No matter what, Russia will be fulfilling its obligations on energy supplies" to Europe. The "bottom line is that Russia stands by its energy-supply obligations." Immediately afterwards, the Kremlin cut oil supplies to Europe through Belarus without notification.

In the past, Moscow has shown a Janus face. Until 2006 it was a highly reliable supplier of oil and natural gas to EU countries, but Russia was utterly unreliable towards post-Soviet countries, including the Baltic countries, which repeatedly suffered serious disruptions in their energy supplies.

The Soviet Union professed contempt for the rule of law, because nothing must restrict the rule of the Communist Party. In the West, however, the Soviet Union was forced to comply with international law because it enjoyed so little trust, especially after the US pipeline boycott against the Soviet Union in the early 1980s. Inebriated with lust for power and energy hubris, President Vladimir Putin has regressed to the Soviet contempt for law and extended it to the West. The Soviet kleptocracy has been restored and corruption is on the rise according to Transparency International.

But Russia is no longer the Soviet Union. It would be wrong to accuse the Kremlin of neoimperialism, because it is sacrificing foreign policy aims for profits. Imperialism costs money, and today's Kremlin prefers greed. In effect, Putin has abandoned the long-professed Russian-Belarusian Union, and Russia is alienating Belarus as aggressively as all other post-Soviet countries.

On the basis of the official Russian statistics, I have calculated that Russia's oil and natural gas subsidies to Belarus amounted to as much as 11.2 percent of the Belarusian GDP in 2005, and they were probably a couple of percent of GDP higher in 2006. Almost all these subsidies have now been eliminated. In addition, Russian taxes now make Belarusian oil refining unprofitable.

Even if Belarus (implausibly) claims a GDP growth of 10 percent in 2006, its GDP is likely to plummet this year because of the new energy prices. Furthermore, Belarus mainly exports to Russia, which has a habit of imposing other trade sanctions as well. Belarus may face a serious economic and political destabilization this year.

Europe needs to wake up and realize that Russia is playing hardball in its energy policy. Forget ideology! Putin's energy policy is reminiscent of John D. Rockefeller. Therefore, we should expect many nasty surprises. Europe needs an energy policy and a Russia policy to coordinate its actions so that it can respond to Putin's tricks and stabilize Europe's energy supplies.

Pathetically, the EU has persistently asked Russia to ratify its Energy Charter and Transit Protocol since 1994, and the European leaders have not realized as yet that Russia will never do so. Therefore, these documents are of no relevance, but Europe needs agreed ground rules for energy trade, especially towards Gazprom, which operates like a national monopoly for transportation and exports. Russia's oil trade is still carried out by individual producing companies, most of them private, but Russia has a state monopoly for oil pipelines, and the EU needs to impose some order there as well.

The best solution would be if the EU sits down with Russia and negotiates a new Energy Charter that Russia is prepared to ratify. One fundamental principle should be equal rights to purchase energy assets and infrastructure. Another tenet should be guaranteed access to energy transportation systems. A third rule should be to strictly prohibit the hurting of third parties of commercial disruptions of energy supplies. Russia wants to bring in nuclear energy, which makes sense. Naturally, all the agreed rules should be reinforced with agreed international arbitration leading to substantial penalties.

If Russia would not agree to negotiate a new Energy Charter, the EU needs to come together and form a common energy policy and negotiate energy deals with Russia as a cartel. Diversification is also needed, but little can be accomplished in the short term.